What increases your total loan balance?
What increases your total loan balance?
Variable interest rates, interest capitalization, and fees and penalties are a few factors that could increase the amount owed on a loan. Borrowers could use tactics like making extra payments, paying more than the minimum amount or seeking out loan forgiveness to potentially decrease the total loan balance.
Your loan balance is growing — but your payments haven’t stopped. Seeing your total loan amount increase despite regular payments can be both baffling and alarming.
Whether you’re juggling student loans, a mortgage, or personal debt, the mysterious forces that inflate your balance often work silently in the background, adding thousands to your total debt without warning. Before panic sets in, let’s pull back the curtain on the sneaky factors and answer exactly what increases your total loan balance — as well as what you can do to fight back.
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| What increases your total loan balance? |
What is a loan balance?
A loan balance is the amount you still owe your lender after making payments. It includes the original loan amount, plus interest, fees, and any other charges tacked on along the way. Lenders keep tabs on your loan balance based on your interest rate, repayment schedule, and how often you make payments.
The interest rate is the cost of borrowing and is influenced by factors like your credit score, loan type, and repayment period. Typically, longer repayment terms mean you’ll pay more in interest overall. Payment schedules can vary from monthly, bi-weekly, to weekly, depending on your lender.
9 factors that can increase your total loan balance
Ever wonder why your loan balance keeps climbing? These 9 financial culprits could be the reason behind your growing debt. Let’s dive into what increases your total loan balance.
1. Interest rates
Interest rates play a massive role in determining how much extra you’ll pay on your loan. Whether you have a fixed or variable rate can make a huge difference.
Fixed rates stay consistent throughout your loan term, offering predictability. Variable rates, on the other hand, can fluctuate — potentially increasing your balance if rates rise. Higher rates ultimately translate to more money out of your pocket over time.
Pro tip: Always understand which type of interest rate you’re signing up for. And if you’re looking to change up your interest rate, you may want to consider if refinancing could be an option.
2. Late fees and penalties
Missed a payment? Lenders aren’t shy about slapping you with late fees that get added straight to your balance. These fees, along with charges for things like prepayment penalties and annual fees – can stack up quickly. Setting up automatic payments or reminders can help you dodge these unnecessary expenses and keep your loan balance from ballooning.
3. Origination fees
Origination fees are upfront costs charged by the lender for processing your loan. Usually a percentage of your loan amount, these fees can be rolled into your balance, increasing the amount you owe from day one. While these fees are often unavoidable, it’s important to know how they impact your overall debt.
4. Loan modifications
Loan modifications, like extending your repayment term or lowering your interest rate, can offer temporary relief if you’re struggling with payments. Stretching out your loan term often means you’ll pay more in interest over time, inflating your total loan balance.
5. Borrowing more money
If you decide to take on a new loan or extend your current one, you’re adding more debt on top of what you already owe. Each new loan comes with its own repayment terms and interest rates, making it tougher to juggle multiple payments and control your overall debt.
6. Refinancing
Refinancing your loan might give you lower monthly payments, but in some cases, it can also stretch out your loan term. Paying over a longer period can often result in higher interest costs, ultimately increasing the total amount you pay back.
Plus, don’t forget the additional fees like application and origination charges that can add to your overall total loan balance.
7. Loan consolidation
Loan consolidation combines multiple debts into one, simplifying your payments. While this can make managing your debt easier, the longer repayment terms associated with consolidation can lead to higher overall costs due to interest accumulation.
8. Defaulting on your loan
Defaulting on a loan is a one-way ticket to debt trouble. When you stop making payments, interest keeps accruing and late fees pile on, causing your balance to soar. Beyond the financial hit, your credit score dives, leading to higher interest rates on future loans.
9. Authorized periods of nonpayment
Authorized periods of nonpayment, such as deferment, forbearance, or grace periods, give temporary relief by pausing your payments. While you’re off the hook for making payments during these periods, interest often continues to accumulate, which can add to your total loan balance once you resume payments.
6 Tips for managing your loan balance
Avoiding loan balance creep requires smart strategies and consistent action. Here’s how to keep things under control:
- Make payments on time: Late fees and penalties can add up fast. On-time payments are the easiest way to keep your loan balance steady.
- Pay off the loan balance early if possible: Paying off your loan ahead of schedule can save you a bundle on interest, especially if there’s no prepayment penalty.
- Set up automatic payments: Automation helps ensure you never miss a payment, reducing the risk of late fees and extra charges.
- Track your balance and payment history regularly: Regularly monitoring your loan helps you catch errors and stay on top of your debt.
- Prioritize paying off high-interest loans first: Focus on knocking out the loans with the highest interest rates first to save more in the long run.
- Avoid taking on additional debt while paying off loans: Adding more loans to the mix makes it harder to manage your debt and can lead to a higher total balance.
Fees
Student loans can come with a variety of fees and penalties that could increase your total loan balance. Some of the most common fees include:
- Origination fee: This is an upfront fee that’s charged by the lender to process the loan. Origination fees are deducted from the loan balance when your funds are disbursed. For example, if you borrow $10,000 and your lender charges a 2.5% origination fee, the lender will take $250 from the principal when it disburses the money. You’ll receive $9,750, but you’ll still have to repay the full $10,000. While origination fees typically don’t increase your balance, you may need to factor it in when deciding how much to borrow.
- Late fee: If you miss a due date, you may have to pay a late fee. The amount can be a flat rate or a percentage of the missed payment. In either case, if the late fee is added to your total loan balance, you’ll pay interest on this fee for years to come.
- Nonsufficient funds (NSF) fee: If you submit a payment but don’t have enough money in your account to cover it, many lenders will charge you an NSF fee for the returned payment. Like late fees, an NSF fee may be added to your total loan balance if you don’t pay it right away.
- Collection fee: You may face collection fees if you default on your loan. Defaulting typically means not making a scheduled payment for at least 90 days on a private loan or 270 days on a federal loan. Once your loan is in default, your student loan debt enters collections, and collection fees can be added to the loan balance.
3 factors that can increase your total loan balance
Variable interest rates
A variable interest rate is an interest rate that changes over time. Depending on market conditions, variable interest rates are tied to a benchmark or index rate that rises and falls.
While variable interest rates can be attractive in a low-interest-rate environment, the threat of rising rates can leave you trapped with high-interest debt.
Most credit cards have variable interest rates. If you carry a balance, your debt could grow if interest rates increase. Unless you can make larger payments towards your remaining balance, the debt will continue to rise.
For example, a Federal Reserve report indicates that the average credit card interest rate rose from 14.60% in the fourth quarter of 2021 to 21.59% in February 2024. The steep rise might cause you to see a growing balance.
Only making the minimum payment
It’s tempting to stick with the minimum monthly payment. But if you only make a relatively small monthly payment, you risk paying less than the interest accrued each month.
The loan balance will rise if the interest charges outweigh your minimum monthly payment. While the minimum payment might feel like a better fit for your budget right now, it might lead to a growing loan balance.
Making late payments or missing a payment
If you make a late loan payment, the first financial hit will likely be a late fee. However, another issue is that your loan balance will continue to accrue interest, leading to a larger balance.
Regularly making late payments could have several negative consequences.
Late fees or penalty charges: Creditors may impose late fees or penalty charges for overdue payments. These additional charges can increase the total amount owed and make it harder to catch up on payments.
Negative impact on credit score: Late or missed payments can have a negative impact on your credit score. A lower credit score can make obtaining favorable terms for future loans, credit cards, or even housing rentals more difficult.
Loss of benefits: Some creditors may revoke benefits, such as lower interest rates or promotional offers if you consistently make late payments or miss payments.
Communicating with creditors if you anticipate difficulties in making payments is crucial to exploring potential alternatives and minimizing the impact on your financial situation.
Tips to keep your loan balance from increasing
Set up autopay
If you struggle to remember payment due dates, consider setting up an automatic payment option. This can help you avoid late fees and ensure that your bills are always paid on time.
Many lenders allow you to set up automatic payments, and some even give you a discount when you choose autopay. Making payments on time can also come with other benefits, like an increased credit score.
Pay as much as you can
The minimum monthly payment won’t get you out of debt quickly. Seeing progress toward a lower loan balance can take significant time. Instead of sticking with the minimum monthly payment, consider making a larger payment each month.
Determine what size payment you can afford by closely examining your budget. If you want to get out of debt faster and avoid growing loan balances, consider cutting back on spending or increasing your income to accommodate larger monthly payments.
Consider making a lump sum payment
While paying off debt, you often have the option to make a lump sum payment to lower your loan balance. Depending on your situation, you might pull a lump sum payment from a windfall or savings.
If you are looking to use your savings to lower your loan balance, carefully assess your financial situation. It’s often the right move to keep some emergency savings on hand. Beyond that, your savings might be put to good use paying off high interest debt.
